Economic Uncertainties Continue to Plague Pakistan and GDP Growth Projected to be Less than 2 Percent

Amid an uncertain economic outlook with high downside risks, the private sector’s participation in economic growth remains unnoticeable as it is not borrowing from banks for business expansion.
April 23, 2024 | 07:00

Political uncertainty remains constant in Pakistan, despite a change of government after the general elections. Amid an uncertain economic outlook with high downside risks, the private sector’s participation in economic growth remains unnoticeable as it is not borrowing from banks for business expansion. The State Bank of Pakistan’s (SBP) latest data showed that the private sector borrowing dropped 36.95pc to just Rs 191.5 billion in the first nine months of FY24. The real estate sector, one of the major contributors to economic growth, has crashed and the construction industry is operating at 20pc of its capacity. The high cost of doing business restricts the private sector from borrowing expensive money. In fact there is likely to be more economic uncertainty if the law and order situation in major cities like Karachi is not controlled.

In its recent estimation, the Asian Development Bank (ADB) has said that Pakistan’s economic outlook was uncertain, with high risks on the downside, as political uncertainty would remain a key risk to the sustainability of stabilization and reform efforts. The ADB’s ‘Asian Development Outlook’ for April 2024. The ADB’s outlook for Pakistan is that although the ‘International Monetary Fund programs have alleviated debt distress risks in crisis-affected Pakistan, challenges remain in sustaining reforms given the substantial debt servicing costs.

Pakistan continued to see some policy rate hikes, despite the fact that most central bank hiking cycles have run their course. The country’s central bank increased rates four times for a total of 600 basis points to combat persistent double-digit inflation. In Pakistan, fiscal revenues remain weak with rising interest payments expected to consume 63% of budget revenues (compared to 39.5% in 2022). ADB projects that Pakistan’s domestic demand will remain constrained by the surge in living costs and tight macroeconomic policies.

While Inflation in South Asia is projected to decline, driven by lower domestic food prices, in Pakistan rising administered energy prices will keep inflation high at 25.0% in FY2024 and 15.0% in FY2025.

Pakistan missed its fiscal targets in FY2023 because the economic slowdown and import controls limited revenue to about 11.4% of GDP. Although nontax revenue rose from 1.9% of GDP to 2.1% as the petroleum levy was raised to its statutory limit, a weak economy caused tax revenue to fall from 10.1% of GDP in FY2022 to 9.2%, despite measures implemented in February 2023 raising direct tax revenue by 0.4% of GDP.

The key projections of ADB’s ‘Asian Development Outlook’ for Pakistan is that growth will remain subdued in FY2024 and may pick up in FY2025, provided economic reforms take effect. Inflation will remain elevated at about 25.0% in FY2024, driven by higher energy prices. Meanwhile, real gross domestic product (GDP) was expected to grow by 1.9pc in 2024, driven by a rebound in private sector investment linked to progress on reform measures and transition to a new and more stable government. The report pointed out that Pakistan would continue to face challenges from substantial new external financing requirements and the rollover of old debt, exacerbated by tight global financial conditions.

In its recent economic update, the World Bank forecast also indicates that Pakistan’s GDP may grow only by 1.8pc-2.5pc in the next fiscal year starting from July. The World Bank’s forecast says that full-year average inflation in Pakistan may be around 26pc, and inflationary pressures will become more pronounced if the security situation in the Middle East worsens

Almost 40 percent of Pakistanis continue to live below the poverty line with little in sight to hope for better days. around 10 million employable people are still jobless, and the number may rise in the coming months even if the recessionary trend seen in industrial output during the first seven months of the fiscal year is reversed. The country’s economic growth faltered to just 1pc in 2023. Overall growth in the current fiscal year (July 2023-June 2024) may hardly hit the 2pc mark amid persisting political instability, deteriorating security environment, rising energy prices, and forex crisis.

The last tranche of $1.1 billion out of a $3bn short-term International Monetary Fund (IMF) loan is expected to come in shortly. It will help keep the exchange rates somewhat stable for a few weeks without taking a major hit on already low central bank foreign exchange reserves. But nothing less than a fast-tracked large IMF loan — around $8bn-$9bn — topped with some climate change funding can help Pakistan move forward on the external account. Pakistan is likely to negotiate for another $6bn or $8bn loan package from the IMF. The donor agency has suggested a number of reforms for generating higher revenues, low fiscal deficit, and reduced current account deficit. The government is willing to implement the reforms, but the outcome is highly critical for the general public and the trade and industry.

Tarah Nguyen
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